Small businesses are the lifeblood of the United States economy. They account for 99.9% of all businesses in the country, 3.9 million of which being construction companies, and have been responsible for two out of every three jobs created over the last 25 years. For small businesses to survive and grow, a cash infusion is often required, and this can be especially true for construction businesses. According to a report from Rabbet, last year there was a 53% increase in the number of late payments for wages and invoices across the construction industry, with 37% of firms reporting they had to halt or delay projects, a 28% increase from the previous year. These slow payments comprised more than a fifth of total construction costs, with a third of contractors being forced to finance cash-flow needs.

When these financing needs arise, the solution typically comes in the form of a business loan or line of credit. While it can be a daunting process applying for a loan, it’s a necessary one for many construction businesses to level up. Being denied a loan during a pivotal juncture in a business’ life can mean the end of the company, which is why it is critical for owners to look for ways to optimize the chances of being approved. Inversely, it is important to be aware of the reasons why owners get denied funding. The most common reason being, a simple lack of organization. 

Get Organized

Being organized when going through the application process for a loan is essential. It’s important to get everything needed together before applying. This includes all necessary documents such as a business license, articles of incorporation, DBA paperwork, trade name association, tax returns, etc. Most banks will ask for two fiscal tax returns meaning the business would need to be in operation for over two years to be considered for funding. The most common documentation component of the loan application process that trips up business owners is ownership. There needs to be a formalized document that specifically outlines who has ownership of the company and its assets. This becomes even more important in the case of a multi-owner LLC. 

After compiling all of the documentation needed, the next step of getting organized is outlining the purpose of the loan. To receive a small-business loan, a stated purpose is required. For example, if the loan is for a piece of machinery, tools or to hire additional employees, that would need to explained in the stated purpose. Knowing what the loan is for will also help decide if a fixed-rate loan or credit card would make more sense. Fixed-rate loans typically make more sense if the business is experiencing significant growth whereas credit cards are more beneficial for everyday expenses. If the loan is approved, the money needs to be used for the stated purpose otherwise the financial institution would have the ability to call on the loan and demand full repayment.  

Semantics

It’s important to note that banks will not lend to sole proprietors as a business, but they will as a consumer. This means if a business owner that is a sole proprietor applies for a loan in their business’ name, the bank will consider them an individual, not a business. This eliminates many of the tax write offs businesses receive. On a related note, even if the contractor applying for funding is not a sole proprietor, they will need to be prepared to sign a personal guarantee. This guarantee means even if the loan is in the business’ name, it puts the owner on the hook to pay off the loan if the business were to fail. 

That makes the individual’s personal financial position vital to securing a loan. Some of the aspects of their finances owners should analyze before requesting a loan include their credit score, debt-to-income ratio, and loan-to-value. There are many places online where individuals can find their credit score for free. Financial institutions are looking for applicants with credit scores in the high 600s at least. For debt-to-income ratio, which is what someone makes in a month in relation to their monthly expenses, banks prefer a DTI of 35% or lower. As for loan-to-value ratio, which is the value of the loan compared to what you are using it for, they are seeking an LTV of 80% or less. To give themselves the best chance, owners should make sure they meet these standards before moving forward with applying for a loan.

Pick Your Partner

The final component of getting organized before applying for a loan is knowing which financial institution to partner with. Applicants should seek a banking partner that fits their requirements. For instance, contractors with busy schedules that don’t have time to get into a branch should not partner with a banking institution that will only originate a loan in-person. Once a list of potential partners is compiled, the next step would be to compare rates.

If a bank is not transparent about their rates and doesn’t have them listed on their website, they can be crossed off the list. Also, owners should look to avoid partnering with banks that charge for applying for or originating a loan. There are quality options out there that do not hit customers with these unnecessary additional fees. 

By following these tips and getting organized before applying for a loan, contractors will greatly improve their chances of securing the funding that will take their business to the next level.